How to enhance your asset allocation
Brussels, May 19th, 2011
Jean-Yves Dumont, CFA, CMT
Head of Asset Allocation Strategy & Funds
Dexia Asset Management
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How to enhance your asset allocation
Agenda
1. Asset Allocation process
1. Strategic Asset Allocation
2. Optimized Asset Allocation
3. Tactical Asset Allocation
4. Downside Risk Control
2. Asset Allocation Strategy
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May 2011
How to enhance your asset allocation
Key points
Long term investment
Capital Preservation
Combining traditional diversified fund management and innovation:
Broad diversification to various asset classes
Dynamic and flexible asset allocation process
A high conviction process with wide and asymmetric deviation margins
Risk management included throughout the whole investment process
with the use of advanced risk measures
and integration of Downside Risk Control in order to protect against short
term unanticipated fluctuations of financial markets
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May 2011
How to enhance your asset allocation
Breaking with conventional investment wisdom
Although it has long been mathematically proven
that strategic asset allocation accounts for the
lion’s share of returns in a diversified portfolio,
the asset management industry has hitherto paid
relatively little attention to it
Most of the research capacity was spent taking
Strategic Asset
Allocation
(Long Term)
Optimised Asset
Allocation
(Medium Term)
temporary tactical deviations through a tactical
allocation process, as well as security selection
But if the strategic framework is not right, the tactical deviations will
not protect the client against what could turn out to be sizeable
losses. In the worst-case scenario this unquestioning focus on the
tactical allocation process can lead to the proverbial Pyrrhic victory
The global financial crisis has challenged conventional investment
wisdom and has put to trial the standard model of a long-term static
framework (strategic asset allocation) with short-term deviations around
it (tactical asset allocation)
At Dexia AM we work with a dynamic intermediate step, the
‘Optimised Asset Allocation’ to be able to weather various
economic environments
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May 2011
Tactical Asset
Allocation
(Short Term)
Security
Selection
How to enhance your asset allocation
Global view of the process
Client’s investment profile &
Investment constraints
Strategic Asset Allocation
Long Term
Horizon of expected returns 3 - 5 years
Frequency of revision: at least once a year
Horizon of expected returns 1 - 3 months
Frequency of revision: continuously
Optimised Asset Allocation
Medium Term
Neutral Equity Weight
(Defensive 0%, Low 30%, Medium 50% or
High 70%)
Dynamic allocation
Tactical Asset Allocation
Short Term
Downside Risk Control
Constraints
Regulatory / Investment Policy
Fixed
Income
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May 2011
Equity
Portfolio construction
Risk Management
Ex-post / Ex-ante
Commodities Real Estate Alternative
Products
Money
Market
How to enhance your asset allocation
Strategic Asset Allocation
Long term
Large range of asset classes
Government Bonds
Corporate Bonds: Investment Grade
Stagflation
Inflationary Growth
Growth Up
Inflation Up
Growth Down
Inflation Up
Credit bonds including the financial sector
High Yield Bonds: Non investment grade
bonds i.e. with a rating less than BBB
Emerging Bonds
Equities including Emerging Markets
Inflation Lkd Bonds Commodities
Alternative Low Vol Real Estate
Real Estate: Listed real estate
Commodities including Energy
Alternative Strategies
Alternative Strategies
Cash
Equities
Govt. Bonds
Alternative Low Vol High Yield Bonds
Corporate Bonds
Emerging Bonds
Alternative Low volatility Strategies:
alternative funds whose strategy generates
a low volatility (i.e. less than 5%) and
generally low correlation with other asset
classes
Growth Down
Inflation Down
Recession
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May 2011
Growth Up
Inflation Down
Non-inflationary Growth
How to enhance your asset allocation
Challenging the Traditional Way
Optimised Asset Allocation
Medium term
As indicated earlier, there is a need to move away from traditional static benchmarks and
to start using dynamic asset allocation processes and advanced risk management
techniques in order to be able to weather various economic environments
We propose a dynamic, more efficient
and well diversified asset allocation
(Optimised Asset Allocation) than the
traditional static reference asset mix
(Strategic Asset Allocation)
Dynamic: Since expectations in returns
and correlations between asset classes
are changing over time, the Optimised
Asset Allocation is regularly reviewed in
order to stabilize the risk-return profile
More Efficient: risk is allocated in a
much smarter way, using appropriate
statistical techniques and applying an
advanced risk measure that takes into
account tail risk
Well diversified: much broader set of
asset classes
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May 2011
How to enhance your asset allocation
Optimised Asset Allocation
Medium term
Introducing expected shortfall as a more appropriate risk measure
Volatility: measures how returns are expected
to be dispersed over time (using standard
deviation).
It characterizes the risk around the mean
How can things evolve?
Value at Risk (VaR): measures the maximum
loss not exceeded with a given probability (called
degree of confidence) over a given time horizon.
It characterizes the risk of the left-tail of the
distribution
How bad can things get (at a given horizon)?
Expected Shortfall, also known as
Conditional Value at Risk (CVaR): measures
the average loss below the VaR.
It characterizes the fatness of the left-tail of
the distribution
If things do get bad, how much could I lose
on average?
We use this risk measure, which is a tailrisk measure
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May 2011
How to enhance your asset allocation
A Process based on Multiple Drivers
Implementation of Dexia Asset
Management views on short-term
market movements
Tactical Asset Allocation is based on
three sets of drivers:
I.
Fundamental
Drivers
Dynamics
Drivers
Reversal
Drivers
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May 2011
Where do we
go?
How do we get
there?
Is the prevailing
trend about to
reverse?
Tactical Asset Allocation
Short term
Fundamental Drivers: the
macroeconomic environment in a long
term valuation perspective
II. Dynamics Drivers: the market
studied from dynamics angle:
earnings, price and risk appetite
momentum
III. Reversal Drivers: composed of
several qualitative and quantitative
indicators and helps to determine if
the prevailing trend is about to
change/reverse
How to enhance your asset allocation
A dynamic process: our main tactical moves in 2010
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May 2011
Tactical Asset Allocation
Short term
How to enhance your asset allocation
Downside Risk Control
Downside Risk Control (DRC)
Past Performances
Diversification works in the long
term but does not protect from
unforeseen short term fluctuations
in the market
Performance Up
Uncertainty Low
Performance Down
Uncertainty Low
methodology has been integrated in the
allocation process with the aim to limit
the downside risk
This method is fundamentally based on
two elements:
Past performances
The uncertainty of the markets
As such, when the uncertainty on the
markets becomes too large or when the
performances of the portfolio are too
weak, the manager will put the focus
on the reduction of risk rather than
the research of a superior return
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May 2011
Market Uncertainty
Therefore an additional investment
Continue to
invest
Start to
disinvest
Start to invest
again
Continue to
disinvest
Performance Up
Uncertainty High
Performance Down
Uncertainty High
(*) Investors should not consider the use of the downside risk
control mechanism as a form of capital protection.
How to enhance your asset allocation
Downside Risk Control
A concrete case : Dexia Portfolio Advanced (DPA B)
Since mid-June 2007, this methodology has been applied with success within the Dexia Portfolio
Advanced funds
40%
0%
-5%
35%
Progressive but
quick reinvestment in
equity to more
than 20%
30%
25%
20%
15%
10%
-10%
-15%
-20%
-25%
-30%
Around 0% of
Equity during
the peak of the
crisis
-35%
-40%
-45%
-50%
5%
-55%
-60%
Ja
n0
Fe 8
b0
M 8
ar
-0
A 8
pr
-0
M 8
ay
-0
Ju 8
n08
Ju
l-0
S 8
ep
-0
O 8
ct
-0
N 8
ov
-0
D 8
ec
-0
Ja 8
n0
Fe 9
b0
A 9
pr
-0
M 9
ay
-0
Ju 9
n09
Ju
l-0
Au 9
g0
Se 9
p0
O 9
ct
-0
D 9
ec
-0
Ja 9
n1
Fe 0
b1
M 0
ar
-1
A 0
pr
M 10
ay
-1
Ju 0
n1
A 0
ug
-1
S 0
ep
-1
O 0
ct
-1
N 0
ov
-1
D 0
ec
-1
Ja 0
n11
0%
% of Equity in DPA B Low
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May 2011
Source: Dexia AM, Bloomberg
Composite Equity (RHS)
*65% MSCI EUR, 25% MSCI World Ex-EUR,
10% MSCI EMG Markets
How to enhance your asset allocation
Downside Risk Control
A concrete case : Dexia Portfolio Advanced (DPA B)
Better risk protection observed since June 2007 within the Dexia Portfolio Advanced
Last update as of 31/12/2010
De xia Portfolio Advanced
Good
historical
performances
Since Inception
2008
2009
YTD 2010
Low
10,34%
-1,50%
7,33%
4,27%
Me dium
12,60%
-6,19%
13,64%
7,26%
High
17,53%
-7,02%
18,19%
9,68%
Since Inception
2008
2009
YTD 2010
S&P
-14,31%
-38,49%
23,45%
12,78%
Stoxx 50 EUR
-29,95%
-43,43%
24,06%
0,04%
8,75%
-54,48%
74,50%
16,36%
Since Inception
2008
2009
YTD 2010
17,55%
9,37%
4,32%
1,17%
Stock Inde xe s
MSCI Emerging Mkts
Bond Inde x
JP Morgan EUR Govt Bonds
*Inception date: June 08th 2007
20,00%
200,00%
10,00%
100,00%
0,00%
0,00%
-10,00%
-100,00%
-20,00%
-200,00%
-30,00%
-300,00%
-40,00%
-400,00%
-50,00%
-500,00%
-60,00%
janv.-08
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May 2011
Smooth and
consistant
returns
-600,00%
avr.-08
juil.-08
oct.-08
janv.-09
Composite Equity
avr.-09
juil.-09
DPA B MEDIUM
oct.-09
janv.-10
MSCI EUROPE
avr.-10
juil.-10
oct.-10
janv.-11
VIX (RHS)
Sources: Dexia AM, Bloomberg
How to enhance your asset allocation
The Investment Strategy

Background favorable to
risky assets

Soft economic growth, inflation
contained
Macroeconomic background is supportive. In
the US, from QE2 to self-sustained growth.
Employment data improving.

Accommodative monetary
policies in developed world.
Monetary policies remain globally very
accommodative but tightening cycle has
begun sooner than expected in Europe.

2 additional “tail” risks have emerged
Main Risks:

MENA unrest and strong increase in oil price

currency war

European peripherals
Japan earthquake/tsunami, global impact on
energy prices, causes supply chain disruptions

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Background has changed somewhat
May 2011
One has expanded:
European peripherals: relief thanks to the
increase of EFSF capacity and creation of ESM.
Rate hikes in Europe will put more pressure on
weakest countries like Spain.
Scenario still positive but less favorable to equities globally

Japanese disaster, increase in energy prices and start of tightening cycle
should have a negative impact on 2011-2012 expected growth

Higher increase in input costs (commodities, energy prices) may also
negatively impact margins

Economic momentum might have peaked
Addresses
Luxembourg
Dexia Asset Management
Luxembourg SA
136, route d’Arlon
1150 Luxembourg
Tel.: + 352 2797-1
Belgium
Dexia Asset Management
Belgium
Place Rogier 11
B-1210 Bruxelles
Tel.: + 32 02 222 11 11
France
Dexia Asset Management SA
40, rue Washington
75408 Paris Cedex 08
Tel.: + 33 1 53 93 40 00
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May 2011
Australia
Ausbil Dexia Ltd
Veritas House – Level 23
207 Kent Street
Sydney NSW 2000
Tel.: + 61 2 925 90 200
Switzerland
Dexia Asset Management
Luxembourg SA
succursale de Genève
2, rue de Jargonnant
1207 Genève
Tel.: + 41 22 707 90 00
Italy
Dexia Asset Management
Luxembourg SA
Succursale Italiana
Corso Italia 1
20122 Milano
Tel.: + 39 02 31 82 83 62
The Netherlands
Dexia Asset Management
Nederlands bijkantoor
Lichtenauerlaan 102-120
3062 ME Rotterdam
Tel.: + 31 10 204 56 53
Spain
Dexia Asset Management
Luxembourg SA
Sucursal en España
Calle Ortega y Gasset, 26
28006 Madrid
Tel.: + 34 91 360 94 75
Germany
Dexia Asset Management
Luxembourg SA
Zweigniederlassung Deutschland
An der Welle 4
60422 Frankfurt
Tel.: + 49 69 7593 8823
Bahrain
Dexia Asset Management
Luxembourg S.A., Middle East
Representative Office
Bahrain Financial Harbour,
Financial Center, West Harbour
Tower, Level 23
King Faisal Highway
PO Box 75766
Manama
Tel.: + 973 1750 99 00
Canada
Dexia Asset Management
Luxembourg SA
Canadian Representative Office
155, Wellington Street West
6th floor
Toronto, Ontario
M5V 3L3
Tel.: + 1 416 974 9055
Disclaimer
This document is published purely for the purposes of information, it contains no offer for the purchase or sale of financial instruments does not comprise investment advice and it is not confirmation of any
transaction unless expressly agreed otherwise. The information contained in this document was obtained from a number of different sources. Dexia Asset Management exercises the greatest care when
choosing its sources of information and passing on this information. Nevertheless errors or omissions in those sources or processes cannot be excluded a priori. Dexia AM cannot be held liable for any direct
or indirect damage or loss resulting from the use of this document. The contents of this document may be reproduced only with the prior written agreement of Dexia AM. The intellectual property rights of Dexia
AM must be respected at all times.
Warning : If this document mentions the past performances of a financial instrument or index or an investment service, refers to simulations of such past performances or contains data relating to future
performances, the client is aware that those performances and/or forecasts are not a reliable indicator of future performances.
Moreover, Dexia AM specifies that:
• in the case where performances are gross, the performance may be affected by commissions, fees and other charges;
• in the case where the performance is expressed in another currency than that of the investor’s country of residence, the returns mentioned may increase or decrease as a result of currency
fluctuations.
If this document makes reference to a particular tax treatment, the investor is aware that such information depends on the individual circumstances of each investor and that it may be subject to change in the
future.
This document does not comprise any investment research as defined in article 24, §1 of Directive 2006/73/CE dated 10 August 2006 implementing Directive 2004/39/CE of the European Parliament and
Council.
If this information is a marketing communication, Dexia AM wants to clarify that it was not designed according to the legal requirements to promote the independence of investment research, and it is not
subject to any prohibition on dealing prior to the dissemination of the investment research.
Dexia AM invites the investors to always consult the fund prospectus before investing in a fund. The prospectus and other information relating to the fund are available on our site at www.dexia-am.com.
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Money does not perform. People
do.
May 2011